Israel’s booming high-tech industry is a significant engine for the economy, employing tens of thousands and drawing billions in investment over recent decades. However, the sector has become a focal point for concern over fears that a political conflict will derail future growth. Plans by Prime Minister Benjamin Netanyahu’s hard-right coalition to give the government a say in the selection of judges and limit the Supreme Court’s power to strike down legislation have raised concerns among current and potential investors.
The tech sector is susceptible to changes in investor sentiment, which can affect not only funding but also the flow of foreign workers and sales. A recent report by Startup Snapshot, a data-sharing platform for the Israeli startup ecosystem, found that 64% of founders were worried about raising their subsequent financing round by August, down from 71% in May. Other top concerns were securing sales and hiring and retention.
Nevertheless, the IVC Research Center and LeumiTech report suggested that startup investment is stabilizing. It said that the amount raised in the third quarter was down 38% over the same period in 2022 but only 14% lower than the second quarter. It added that mature-stage companies, which are at revenue growth stages, raised six times as much as seed and R&D-stage startups.
Early-stage rounds – including pre-seed, seed, and series A investments – declined by 62% compared to Q1/2022. But the number of mega-deals — deals worth over $100 million — rose to three from five in the first quarter, with the total amount raised in the two quarters hitting $5.3 billion.
Investors are focusing on companies with solid fundamentals, the report said. The top areas of interest for VCs in the third quarter were cyber, fintech, and big data. The Israeli market is popular with international investors, including the New York-based Tiger Global Management, which has backed more than 16 Israeli startups.
But the heightened uncertainty has made it more difficult for startups to raise capital, the report said. It said the number of venture capital firms investing in Israeli startups dropped by 21% from the previous quarter to a record low of 31. The number of private equity funds also fell to a record low of 66.
Despite the drop in investment, it said the overall trend of increasing investment returns in Israeli startups remains positive. The fourth quarter is expected to improve as investors seek companies with “tangible and measurable growth.” Complete quarterly data will be issued in October.
